I was reading something this week on how the Fed could "exit" it's positions of US Treasury Securities and Agency Securities that it has purchased over the last several years. I'm sorry I cannot find this original link; but the correspondence stated several approaches that the Fed could use, the first of which in this case was redemptions.
I follow these types of correspondences not obsessively but pretty closely, and had never seen "redemptions" identified as primary.
The Fed has moved the average duration of it's Treasury portfolio out close to 10 years which would be a long time to wait for redemption; but another option involves the fact that the Treasury can redeem it's securities early; before the maturity date. Here is an instruction from the CFR on how they can go about it. Excerpt:
§ 375.30 Does the Treasury have any discretion in this process?
(a) We have the discretion to:
(1) Accept or reject any offers or tenders submitted in a redemption operation;
(2) Redeem less than the amount of securities specified in the redemption operation announcement;
(3) Add to, change, or waive any provision of this part; or
(4) Change the terms and conditions of a redemption operation.
(b) Our decisions under this part are final. We will provide a public notice if we change any redemption operation provision, term or condition.So conceivably, at a point at which the Fed would want to "shrink their balance sheet ", the Fed could request that the Treasury conduct a redemption operation and then Treasury could only redeem the securities offered by the Fed. All decisions final.
The Fed carries all of the Treasury securities it "owns" at "face value". See Note 2 to Table 1 of the Fed's weekly H.4.1 report here; and the Treasury can certainly redeem it's securities at "face value". So no need to worry about the Fed "losing money".... [Ed: LOL!]
Previous Fed communications have stated that any "exit process" could take 3 to 5 years; if by "exiting" the Fed means reducing it's balance sheet from the present level of about $2.8T down to the previous level of about $1.3T then that looks like a reduction of $1.5T max over 5 years or around $6B per week. Probably less as the Fed also "owns" a goodly amount of MBS some of which would likely be redeemed also over this time by the Agencies that issue those securities.
If these two government entities, Fed and Treasury, would cooperate in this way, this would seem like a very easy process to accomplish. Treasury would just increase it's plans for usual redemptions by $5B per week and the Fed would surrender it's Treasury securities as they were redeemed early.
FD: This whole post is a bit out of the MMT paradigm and to an extent "enters the mind of the moron"; but sometimes you have to do that so that you are not surprised by their actions when they are the ones running things.